• December 21, 2014

As president pushes for $10.10 an hour, economists divided on minimum wage hike effects

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Posted: Sunday, February 23, 2014 4:30 am

During his annual State of the Union address in January, President Barack Obama said he would use his executive power to raise the minimum wage for federal contractors, shocking some public officials.

This month, a new bill to increase the minimum wage to $10.10 gained momentum in Congress, and Obama followed through on his promise to federal contractors.

Locally, the Texas Democratic party unveiled the “A Living Wage for All Texans” opinion poll that will appear on the March 4 Democratic Primary. The proposition calls for the federal hourly minimum wage to be raised from $7.25 to “110 percent above the federal poverty line for a family of four without exception.”

“Essentially it’s an opinion poll for the members of a political party,” said Lisa Paul, a staff member with the Texas Democratic Party. “It won’t show up on another ballot, but will be used to help educate our party leaders and elected officials on how strongly party members feel about a specific issue.”

The way it is worded, “A Living Wage for All Texans” would raise the minimum wage to $12.63 per hour, said Paul Stock, interim dean of the McLane College of Business at the University of Mary Hardin-Baylor in Belton.

He said the wage hike seems excessive.

“That’s what they are recommending. That’s a 74 percent increase compared to what the minimum wage is now.”

However, the last time minimum wage was increased was five years ago, he said. If the current minimum wage had kept up with inflation, it would be about $8.56 in 2012, according to a Pew Research Center report based on 2012 census data.

Many theories

Experts and researchers offer multiple theories about the impacts a dramatic minimum wage increase would have on the economy.

Douglas Dyer, an economics and finance professor at Texas A&M University-Central Texas, said the economy would not be greatly affected if wages were adjusted gradually for inflation, but if they spiked more than 10 percent the economy would react negatively. With enough economic pressure, the job force could be reduced, he said. For example, a Walmart cashier could be replaced by an automated self-checkout system.

“Basically, you cannot pay people more than the value their services add to the company,” Dyer said.

A 2013 report published by the Center for Economic and Policy Research, a nonprofit, nonpartisan organization that researches social issues, refutes that idea. According to the report, no data supports the theory that a significant number of jobs would be lost if minimum wages are raised modestly. Citing several studies stretching back to the 1970s, the report cited multiple ways businesses could react to a wage increase without simply slashing jobs. Those strategies included reducing work hours, employee benefits and training costs, seeking more highly qualified candidates, giving workers more responsibility, decreasing wages for upper-tiered employees and taking the hit in profits.

Hardest hit

Both Dyer and Stock agreed that a minimum wage increase would hit small businesses hardest because they operate on smaller profit margins.

Stock said consumers also would be impacted by a minimum wage hike, since businesses would most likely raise prices and rates to offset the added expense. Additionally, outlying groups like service-industry workers or those who currently make slightly more than the minimum wage could see their living expenses increase.

A 10 percent U.S. minimum wage increase raises food prices by no more than 4 percent and overall prices by no more than 0.4 percent, according to the Center for Economic and Policy Research report. A 74 percent increase in wages, as proposed by the Texas Democratic Party, would result in a 28 percent rise in food costs, Stock said.

Despite the negatives, Stock said the increased buying power a higher minimum wage would give low-wage workers would greatly stimulate the economy and far outweigh the “costs.” For that reason, he would vote for the minimum wage to be raised.

Dyer, however, remains concerned about the possible motivations for companies to decrease human labor and the long-term effect the law might have on the economy.

“You’re going to see more and more incentive for businesses to replace human labor with automated labor that you don’t have to supply health care for ... and there will be more and more of a push for two people to do three people’s jobs,” he said.

If the real concern is providing a better life for a family on minimum wage, and with around 20 percent of minimum wage workers the primary support for their families, Dyer said increasing wages was like “hitting a fly with a sledgehammer.”

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